Business context and reporting period
This is Gardner Denver Holdings, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2019—not a filing by Ingersoll Rand Inc. Gardner Denver manufactures flow-control and compression equipment and aftermarket products and services through its Industrials, Energy and Medical segments. Unless otherwise noted, amounts are in U.S. dollars in millions.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $620.3 | $619.6 | +0.1% |
| Gross profit / margin | $230.5 / 37.2% | $231.9 / 37.4% | Margin down 0.2 percentage points |
| Operating income / margin | $80.2 / 12.9% | $89.8 / 14.5% | Down $9.6 |
| Net income | $47.1 | $42.4 | +11.1% |
| Diluted EPS | $0.23 | $0.20 | Up $0.03 |
| Adjusted EBITDA (non-GAAP) / margin | $140.1 / 22.6% | $148.2 / 23.9% | Down $8.1; margin down 1.3 points |
| Operating cash flow | $68.8 | $60.2 | + $8.6 |
| Free cash flow (non-GAAP) | $54.7 | $50.1 | + $4.6 |
Net income increased despite lower operating income, principally due to lower interest expense and a lower income tax provision. The effective tax rate was 20.3%, compared with 35.6% in Q1 2018. Adjusted net income was $79.3, down from $80.7.
Segments
| Segment | Revenue, Q1 2019 (year-over-year) | Adjusted EBITDA / margin |
|---|---|---|
| Industrials | $318.1 (+0.4%; +5.6% constant currency) | $71.0; 22.3%, up 1.2 points |
| Energy | $233.1 (−3.8%; −1.1% constant currency) | $60.0; 25.7%, down 2.4 points |
| Medical | $69.1 (+14.2%; +19.1% constant currency) | $20.0; 28.9%, up 2.6 points |
Liquidity, debt and balance sheet
At March 31, 2019, cash was $263.7, total debt was $1,630.2, and current assets and current liabilities were $1,398.3 and $616.2, respectively. Cash increased $42.5 from year-end 2018. Long-term debt, net of current maturities, was $1,622.3, down from $1,664.2. The company repaid $25.0 of Dollar Term Loan principal in March and reported $26.9 in total principal payments on long-term debt during the quarter.
Unused availability was $264.3 under the revolving facility and $73.6 under the receivables financing agreement; there were no outstanding borrowings under either facility. A receivables-financing DSO covenant was not met at quarter-end, but the lender waived the requirement; the next test was scheduled for June 30, 2019. Management stated that available cash, operating cash flow and facility availability should fund foreseeable needs. Inventory rose to $555.1 from $523.9 at year-end, contributing to operating working capital use of cash.
Changes, outlook and significant items
- Revenue was broadly flat: acquisitions, pricing and non-upstream markets offset lower upstream Energy sales and unfavorable currency effects. Aftermarket represented 39.5% of revenue, down from 41.1%.
- Energy was the main area of weakness: segment orders fell 28.5% year over year (26.4% constant currency), with upstream-market revenue down 11.3%. Industrials orders were down 0.9% reported but up 4.0% constant currency; Medical orders declined 5.3% reported and 1.2% constant currency.
- Management described a slower but positive industrial-production outlook. It expected upstream Energy demand growth to slow, with some factors potentially declining, while midstream, downstream and petrochemical markets were described as relatively stable. Medical demand was expected to benefit from secular healthcare trends. Full-year 2019 capital expenditures were expected to be approximately $50–$60.
- Restructuring charges were $2.0 in Q1; further workforce optimization and facility consolidation were expected during 2019. Other operating expense rose to $11.2 from $4.3, including higher stock-based compensation and employer taxes, restructuring costs, currency losses and lower asset-disposal gains, partly offset by litigation-settlement insurance recoveries.
- On April 30, 2019, after quarter-end, Gardner Denver and Ingersoll-Rand plc announced a proposed Reverse Morris Trust transaction. Ingersoll Rand’s Industrial segment was to be separated and combined with Gardner Denver; the transaction contemplated $1.9 billion of newly issued debt and 50.1% ownership for existing Ingersoll Rand shareholders after closing. Closing was expected by early 2020, subject to shareholder and regulatory approvals and other conditions.
- Key exposures include energy-market volatility, foreign exchange, raw-material costs, competition, acquisition integration, substantial indebtedness and variable interest rates. Asbestos and silica litigation reserves were $105.2, with a $102.9 insurance-recovery receivable; recovery depends substantially on insurance coverage litigation. Environmental liabilities accrued were $6.4. Management said these matters were not expected to have a material adverse effect, while acknowledging uncertainty.
Important facts for investors to verify
- Confirm the issuer and transaction context: this Q1 2019 filing is for Gardner Denver Holdings, not Ingersoll Rand Inc.; the proposed combination was announced after the reporting date.
- Track Energy orders, upstream exposure and segment margins, given the steep order decline and lower Energy profitability.
- Assess the sustainability of earnings and cash conversion, including working-capital needs, inventory growth and the impact of non-GAAP adjustments.
- Monitor debt, interest-rate exposure, facility availability and the receivables-financing covenant after its waiver.
- Review the merger’s financing, approvals, integration risks and potential termination fee (approximately $176 million in specified circumstances), along with asbestos-insurance recovery assumptions.